Fitch: Swedish Bank Results Solid Despite Negative Rates
OREANDA-NEWS. Swedish banks have reported good results for 2015, demonstrating their continuing ability to navigate the challenge of negative interest rates and higher capital requirements, while maintaining large dividend payments, says Fitch Ratings. The major banks (Nordea Bank AB, Svenska Handelsbanken, Swedbank, Skandinaviska Enskilda Banken) achieved a return on equity between 12% and 14% in 2015, underpinned by strong revenue generation, expansion of fee-driven business, tight cost controls and low loan impairment charges.
Dividend pay-out ratios are high by international standards and the four banks propose to distribute between 70% and 75% of 2015's net income to shareholders. But interest rates moved more deeply negative today following a cut by the Riksbank and this is putting pressure on revenues. Two further key factors could also constrain high pay-outs in the future: a significant housing market correction and a tightening of capital requirements.
A house-price correction cannot be ruled out and we think that the trend of ever-rising house prices in Sweden, partly financed by increasing household indebtedness, could eventually create difficulties for households when interest rates rise or should unemployment increase. While today's rate cut makes significant interest-rate rises unlikely in the medium term, it risks fuelling household indebtedness unless the banks maintain their underwriting standards and require households to at least partly amortise the loans.
On a risk-weighted basis, capital ratios for the four Swedish banks compare well with most peers', with common equity Tier 1 (CET1) ratios ranging from 16.5% to 24.1% at end-2015. Leverage ratios are less impressive but are in line with other highly rated international peers. Fully loaded Basel 3 leverage ratios range from 4.4% to 5%.. The banks' high dividend payout ratios could be curbed if the Basel Committee on Banking Supervision's efforts to harmonise risk weights come into force because this could result in lower risk-weighted capital ratios and buffers at the Swedish banks. But the starting position is strong and we expect modest balance sheet growth in 2016.